Biomass Policy and Finance Roundup

By Roger D. Stark | May 23, 2011

As oil prices hover above $100 per barrel, a variety of policies are vectoring U.S. bioenergy markets, creating a mix of uncertainties and opportunities that vary depending on federal policy determinations and the financial markets. The U.S. EPA has created uncertainty regarding the treatment of biomass as a carbon-neutral fuel under the Prevention of Significant Deterioration Clean Air Act permitting program, and its earlier determinations cast a cloud over whether biomass would qualify for favorable treatment under clean energy standards being considered in Congress. Separately, the approaching sunset of some federal tax incentive and loan guarantee programs requires action by biomass sponsors. Collectively, these trends are putting a premium on strategic project development decisions.

Under most greenhouse gas (GHG) accounting systems, emissions of carbon dioxide from biomass are not counted because they are equal to the emissions that would occur due to the natural oxidation of biomass. In issuing initial PSD regulations and guidance, EPA inconsistently counted emissions from biomass in determining whether the PSD permitting trigger applied, while also suggesting that biomass fuels would reduce GHG emissions. EPA has deferred final resolution for three years, during which biomass carbon dioxide emissions are ignored for purposes of calculating whether PSD review and permitting requirements have been triggered.  Other recent EPA rulemakings suggest it considers biomass to be a low-carbon fuel. Despite the temporary exemption, EPA’s final position on carbon neutrality is likely to follow other programs and most international and voluntary standards that favor the use of sustainably managed biomass. 

Project sponsors can take comfort in the fact that PSD construction permits issued for biomass facilities during EPA’s temporary exemption period, and that are not challenged on other grounds, will become final and binding in the ordinary course. Likewise, existing Regional Greenhouse Gas Initiative and proposed California regulations will favor sustainably managed biomass by ignoring its emissions for purposes of determining whether biomass facilities must purchase allowances under applicable cap-and-trade programs. Although EPA is developing additional GHG standards for electric generating units under CAA Section 111, these standards also will likely favor biomass by allowing states to create the standards and encouraging states to join existing cap-and-trade programs that favor biomass.

Biomass investments will continue to enjoy the benefits of state renewable portfolio standards, which generally allocate renewable energy credits to electricity generated from sustainably produced biomass.  

From a tax policy standpoint, biomass continues to benefit from incentives under applicable investment tax and production tax credits, and the U.S. Treasury grant in lieu of tax credit program.

Under current law, open- and closed-loop biomass projects qualify for the production tax credit under Section 45 of the Internal Revenue Code, or the 30 percent investment tax credit (in lieu of the Section 45 credit), under IRC Section 48, until the end of 2013. Biomass projects also continue to be eligible for treasury cash grants in lieu of the Section 48 credit; provided that they file timely applications with treasury and comply with the applicable commencement of construction and in service deadlines (the latter deadline being Dec. 31, 2013).

On the financing front, some tax advantaged investments are making a comeback.  During the financial crisis, the rate of return for so-called tax equity peaked at levels in excess of 15 percent shortly before tax equity markets collapsed. Tax equity returns have since returned to precrisis ranges and there is a resurgence of investors ready to enter into tax credit transactions. On the debt side, however, tax-exempt debt transactions have not returned to precrisis levels.

The USDA loan guarantee program is generally user-friendly and offers the potential for cofinancing guaranteed project debt with tax exempt debt.

It remains to be seen how two key factors affect biomass. First, if the recent oil price spike extends, considerations regarding energy security and project economics will likely favor biomass development. Second, the Obama Administration’s Clean Energy Initiative offers opportunities for biomass proponents to affect the policy agenda and could enhance the policy environment for biomass projects. These developments present a picture of discrete risks and substantial opportunities, and put a premium on thoughtful near-term development and investment choices for individual projects and the industry.

Authors: Roger Stark
Partner, Ballard Spahr LLP
(202) 661-7620